big four banks systemic risk : imf, page-4

If history is anything to go by, and generally it is, this report published by the RBA titled A HISTORY OF LAST-RESORT LENDING AND OTHER SUPPORT FOR TROUBLED FINANCIAL INSTITUTIONS IN AUSTRALIA is quite a detailed account of how this event has occurred throughout Australia's history.

I personally believe should a financial black swan event or a hard recession in the coming years hit Australia, the first things we will see is large property developers head into administration (this should be the warning sign to head for the exits), then we will see large write downs in both the Big 4 and the smaller institutions on their commercial/residential mortgage portfolios.

Then, for some of these smaller institutions who either had too lax lending standards or were able to obtain cheap credit through the RMBS scheme, the write downs may cut too deeply into their reserves/capital and then they would be at real risk of failure.

I personally believe BOQ could be one of the first off the ranks to show signs of distress, given its exposure to the toxic Queensland Property market and all that cheap RMBS money it's lent out. How quickly the contagion spreads throughout the financial system will depend on what sort of backstop facility the RBA can come up with, you can judge their ability to act decisively and with enough haste based on your opinion of how they managed the GFC.

Should the contagion not be contained by the RBA once cracks emerge in the smaller institutions and a Big 4 is threatened, the approach most likely to occur is the nationalisation of the bank, Stevens would never let it fail, for if he did mass bank runs on the other 3 would occur and the entire thing would fall apart.

The whole concept of the guarantee to me was never about should a bank fail you would receive your money back, because the bank can never be allowed to fail. If it did the RBA would have to print so much cash overnight to make good on their promise and pay out those amounts, that not only would the financial system collapse because the other 3 would have a run on them, the potential for hyperinflation, mass unemployment and a harsh depression would probably await.

It's all just a promise based on trust and the hope that the Government Backed Guarantee Bazooka never has to see the light of day!